GyneConcepts v. Kim: A Rare Calculation of Damages in a Breach of Fiduciary Duty Claim

In the brief post-trial decision of GyneConcepts, Inc. v. Kim, No. 4820-CC (Del.Ch., Aug. 17, 2010), the Delaware Court of Chancery computed the damages incurred by GyneConcepts after finding a breach of fiduciary duties.  The court set the total amount of damages at $1,181,708. 

According to the complaint, Kim was a former officer and director of GyneConcepts.  The Complaint essentially alleged that he asserted ownership over certain "improvements" to a medical device owned by the Company.  The Complaint also asserted that Mr. Kim used corporate funds to "fund his lavish lifestyle."   

After a trial, the Vice Chancellor found for plaintiffs.  In a post-trial ruling, the Vice Chancellor determined the amount of damages owed by the defendant.  The court separated its analysis into four parts: (1) Out-Of-Pocket Loss, (2) Lost Value Due to Delay (Lost Profits), (3) Lost International Patent Rights, and (4) Pre-judgment Interest. 

First, the court awarded specific damages to GyneConcepts for Out-of-Pocket Loss in the amount of  $215,000 for licensing monies paid to Kim’s wholly owned and operated LLC for the invention that Kim wrongfully claimed.   The court also awarded $173,000 for lawyer’s fees for bills that would not have otherwise been incurred.  

The Vice Chancellor also included $43,708 related to Kim’s travel expenses between May 2007 and February 2008.  As the letter opinion described:

• All of these lavish expenses were incurred at a time when Kim agreed the company could not even afford to hold a stockholders' meeting. These expenses were a frivolous waste of company resources. Contrary to the defendants' argument, I know waste when I see it, and no "expert" must testify "as to whether Kim's conduct was within the range of reasonable conduct of investment bankers seeking wealthy investors." It clearly was not reasonable conduct, as any perusal of the transcript of this proceeding will amply demonstrate.  . . . GyneConceptswas an undercapitalized start-up medical technology company that operated on a shoestring budget. The type of extravagant expenditures incurred in this case were wholly inappropriate. (citations omitted)

Second, although GyneConcepts likely suffered loss profit damages, the court deemed it impossible to calculate that loss.  GyneConcepts relied on a simple Microsoft Excel spreadsheet created by Kim to validate their claim of $23 million and $43 million for lost profits. The court, however, concluded that the amounts were not credible.  See Id. ("Kim's use of these calculations in negotiations with the Company were completely self-serving and (so far as I can tell) created from thin air.").  Without any other evidence of lost profits, the court declined to award that type of damages.  

Third, GyneConcepts sought damages due to the loss of international patent rights.  The loss deprived GyneConcepts of potential revenues.  Nonetheless, the court again confronted problems with the evidence of lost revenues. 

• no credible evidence exists that would enable me to calculate, with any degree of precision, the potential revenues lost to GyneConceptsas a result of Kim's misconduct.The best measure of harm to the Company from the loss of the international patent rights is Kim's own assertion of the "replacement cost" of international patent protection as a single invention in the fifty largest countries of the world. That cost, according to Kim, is "roughly" $ 750,000. 

The court accordingly awarded an additional $750,000 for these damages. 

Finally, the court awarded pre-judgment interest, noting that the payment was "a matter of right."  As the court concluded:  "No reason appears why an award of pre-judgment interest would be unfair or unjust."  Accordingly, the court granted GyneConcepts pre-judgment interest on all three categories of damages awarded.  

The primary materials for this case can be found on the DU Corporate Governance site.